Should New Zealand business spend more on R&D and Innovation?
Recap of previous article ‘What is Knowledge Based Capital and why is it important?’:
In my last blog I wrote that the speed in which new technology is adopted by New Zealand firms has slowed since 2001 compared to other OECD countries.
In addressing the reasons why, I discussed that New Zealander’s have a culture of ‘doing it myself’ and as a result, technology diffusion into Kiwi organisations has been slower than our OECD Partners. This would help explain our low Labour Productivity rates.
But further to the above, other factors are at play here which have also led to lower Labour Productivity rates.
How does New Zealand’s R&D expenditure fare against other Countries?
Despite the notion that New Zealanders are good innovators, both expenditure in R&D, innovation and on managerial capability is minimal in comparison to other first world countries. As a result, New Zealand has a weak technology diffusion so we are not getting that Labour Productivity uplift we need.
The table below shows R&D expenditure as a percentage to total GDP for 2015-16. This is total spend on R&D by all sectors of the economy (ie) Business Sector, Government, Education Sector and Not For Profit Sector.
https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm COUNTRY R&D Expenditure % to total GDP
New Zealand 1.2
Australia 1.9
USA 2.7
TOTAL OECD 2.4
This next table shows what Percentage of GDP New Zealand spends on all aspects of Knowledge Based Capital (i.e.) investment in Software to improve efficiency, Research & Development, implementing new business models to make best use of efficiencies created by new software and Organizational Know-How from well- rounded management.
(Figures are from 2015)
So, we can see that the Business Sector in New Zealand has spent approximately 0.5% of GDP on Knowledge Based Capital versus around 1.4% for Australia.
Does our Small Domestic Market lead to low Labour Productivity?
Another possible reason for our low Labour Productivity is our lack of exposure to international competition and our small domestic market.
How does this negatively affect productivity performance?
It’s easier for businesses to trade domestically. When competition from an international arena is not present, there is no real pressure to innovate and adopt technology to lift labour productivity. Firms trading internationally do need this innovation to compete. And because we are isolated from interacting with these overseas firms, we do not get exposed to the technologies they are implementing.
Consequently, domestic focused organisations don’t see the need to spend money on R&D and innovation.
Lack of international competition is very important.
Only about 8% of Kiwi organisations are actively exporting on a consistent basis.[1]
Apart from the Dairy Sector (26% of total NZ exports) where Kiwi innovation is up there with this sector internationally, we are not up to date with latest technologies that overseas companies may be using. Therefore, we do not operate as efficiently as these overseas companies.
We can see this trend by looking at foreign companies that operate in New Zealand. They are generally more productive than domestic firms that operate in the same industry. Also, firms that export and compete internationally tend to be larger, more productive, attract more skilled management, are more capital intensive and pay higher wages.
[1] Achieving New Zealand’s Productivity Potential – Research paper 2016/1. Section 4.1
How do other countries use Labour Productivity?
Typically, in European or North American countries, when a foreign owned company sets up operations, the technology that these firms adopt tends to flow to other domestic competitors so they in turn become more productive and can compete.
This is consistent with the view that when you are exposed to international trade, it facilitates learning.
However, these trends of technology transfer do not seem to happen a lot in New Zealand domestic firms when foreign firms set up here.
One can only deduce that our management style in New Zealand is not as ‘cut-throat’ as overseas management and we do not want to spy or want to copy foreign competitors in the adoption of state of the art technologies. Or worse, we do not want to spend the money. All to our detriment!
Another potential reason is New Zealand’s lack of Management up-skilling. I will discuss this in my next article.
Read on in my next article ‘Do Kiwi Business Managers have what it takes?’.
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